Question 1

What is compound interest?

Accepted Answer

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes wealth to grow exponentially over time.

Question 2

What is the difference between compound and simple interest?

Accepted Answer

Simple interest is calculated only on the principal. Compound interest is calculated on the principal plus all previously earned interest, making it significantly more powerful over time.

Question 3

What annual return should I use?

Accepted Answer

The S&P 500 has historically returned about 7% annually after inflation. For a savings account, use your current APY. For bonds, use the coupon rate.

Question 4

How much does monthly contribution affect the result?

Accepted Answer

Enormously. Adding even $100/month to a $10,000 investment at 7% over 30 years adds over $120,000 to the final value compared to investing the lump sum alone.